10 September 2025: Government Ministers are showing their inexperience

It is clear that Rachel Reeves needs to present a budget for growth. That is what is needed to set the country on the path towards prosperity, and is what both the Prime Minister and Chancellor have been telling the public is their goal since they were elected. However, Reeves remains mired in the problems that remain concerning borrowing and balancing the books. The level of Public Sector borrowing has skyrocketed, and Reeves is in no position to cut public services any further, so it comes down to either raising taxes or more borrowing.

She has backed herself into a corner by showing her inexperience by pledging that she would not raise income tax or national insurance, two taxes that affect ordinary working people or VAT and has introduced a "lead and collar” for herself by also limiting the level of borrowing to fund everyday expenses.

Her view is that the country should be able to see significant income from taxation to fund everyday outgoings. That may work in normal domestic surroundings, but running a country has far more pitfalls than “Mr and Mrs Smith” next door.

Tax income is flowing into the Treasury, but not at the rate that is needed or was expected.

The issue is growth, which has been anaemic at best since the election. It is obvious that it was not Reeves' intention to stifle growth when she introduced measures to try to increase the flow of tax revenue last year, but that is what has happened. Again, it shows her inexperience, coupled with a stubborn streak that does not allow her to take advice from her Treasury team.

Following a week of turmoil with the resignation of the Deputy Prime Minister and a record number of arrivals in small boats, the Prime Minister desperately needs a “win”, but it is hard to see where he will find one.

He is faced with a constant stream of criticism from Nigel Farage and his Reform Party, who are gaining popularity almost by the day, while he is coming to realise that it is easier to be in Opposition, where there is no accountability to voters, and he can make promises he does not expect to have to keep.

Although the rise in the cost of long-term borrowing is not a problem that can solely be laid at the feet of the Chancellor, the Bank of England is not helping the issue by reducing the size of its balance sheet by selling off swathes of its bond holdings and not replacing those that are maturing.

The Bank’s Monetary Policy Committee, free of political influence, may provide a little support for the Treasury by cutting short-term rates next week as the balance of risks has swung towards growth over inflation.

The pound rallied to a high of 1.3590 yesterday, its highest level since early July when the effects of Trump’s tariffs were still unclear, but it quickly suffered significant amounts of selling and retreated to close at 1.3527.

The odds are continuing to grow on the Federal Reserve easing monetary policy at its meeting next week. This is unlikely to placate Donald Trump, who may well try to mask more issues in his personal life by heaping more criticism on Jerome Powell for the Central bank's perceived delay in cutting rates, even though he is to blame for any delay.

Even if rates are cut by either twenty-five or a highly unlikely fifty basis points next week, marking the beginning of a run of rate cuts that could stretch into next year, the Fed may well be accused of feeding inflation, which is only barely under control even now.

Federal Reserve blackout periods, which begin the second Saturday preceding an FOMC meeting and end the Thursday following a meeting. This means that FOMC members are already precluded from making their voting intentions public.

At a time when the outcome of the vote is likely to be close, markets began to speculate, given their knowledge of members’ predilection towards a hawkish or dovish stance.

The Federal Open Market Committee (FOMC) consists of 12 voting members: the seven members of the Federal Reserve Board of Governors, the President of the Federal Reserve Bank of New York, and four of the presidents of the remaining 11 Reserve Banks.

The New York Fed President is a permanent voting member, while the other Reserve Bank presidents serve on a rotating, one-year basis. The Chair of the Board of Governors serves as the FOMC Chair, and the New York Fed President serves as the Vice Chair.

With political influence a “hot topic”, it is likely that there are two, possibly three, permanent members whose vote to cut is assured.

A lot will depend on tomorrow's publication of August’s inflation data, which is expected to show that price increases remained at 3.1% throughout last month. This would normally provide the FOMC with cause for concern, but having already said the balance of risks has tilted, even marginally, towards falling job growth, the Fed is more likely than not to cut rates.

Producer prices, which indicate inflation “at the factory gate,” are due for release later today. The headline number is expected to have fallen to 3.5%, down from 3.7% in July.

Only a run of at least three rate cuts, or a single “jumbo” cut followed by a series of smaller ones, will satisfy the President, but any such move could see the dollar's flimsy remaining support collapse.

The dollar index attracted buying interest yesterday from a market that believes that it has lost too much ground recently. It rallied to a high of 97.82, closing at 97.77

The single currency is finding reserves of unexpected strength derived from the expectation that the ECB will not cut rates at tomorrow's meeting and remain sidelined, possibly, for the rest of the year.

At its meeting tomorrow, the ECB is expected to declare that the region’s economy is in a good place despite the current turmoil in France, which it hopes with remain political and not spill over too much into the economy.

Prime Minister François Bayrou, who is set to resign after losing Monday’s confidence vote over his deficit-slashing budget, warned last month that “over-indebtedness” poses an “immediate danger” to the country’s prosperity. Finance Minister Eric Lombard has even suggested that soaring national debt could force Paris to request a bailout from the International Monetary Fund. However, those fears are not shared by the wider market, which is simply regaining the situation of simply more “French overreaction”.

Exacerbating the sense of impending doom, France’s government borrowing costs are now higher than Greece’s, sparking fears that Europe could suffer an economic meltdown far worse than the one triggered by Athens’ financial collapse in 2009.

Analysts, however, note that the imminent risks posed by France’s rising bond yields and debt levels are mostly exaggerated.

“To be sure, France is facing a political crisis, but not a financial crisis,” Nicolas Véron, a senior fellow at Bruegel and the Peterson Institute for International Economics, told Euractiv.

Experts point out that the ‘inversion’ in Greek and French bond yields is overwhelmingly due to a sharp improvement in market confidence in Greece, rather than a deterioration in investors’ attitudes toward France. At 3.41% the yield on 10-year French government bonds is also well below the 3.50% interest rate paid by Italy, which is not in any immediate financial peril.

Lombard’s claim that Paris could soon require an IMF intervention also “makes absolutely no sense”, Véron said. He added that, in the unlikely event that the EU’s second-largest economy did require a bailout, it would be the European Stability Mechanism (ESM), and not the IMF, that would come to France’s financial rescue.

Christine Lagarde, President of the European Central Bank (ECB), announced the arrival of Marián Kočner as the new Governor of the Austrian National Bank.

She welcomed him to his first ECB Governing Council meeting, expressing her anticipation for their collaboration. Kocher's experience in economics and policy is expected to play a significant role in meeting the financial goals of the ECB. This appointment comes at a crucial time for the central bank as it navigates through complex economic challenges.

Lagarde highlighted the importance of the Governing Council's work in safeguarding the euro and maintaining price stability. As the council convenes, Kocher's insights will contribute to shaping monetary policy across the Eurozone. His tenure could influence significant decisions impacting the European economy.

Kocher is not thought to hold the same hawkish attitudes as his predecessor, who was often seen as a one-man campaign for higher interest rates.

The euro gave back most of its gains from the previous session yesterday, but crucially managed to close at 1.1709, which meant it retained its bullish sentiment.

Have a great day!